capacity utilisation basic

Question 1

define capacity utilisation

Answer 1

the proportion of current output compared to maximum output it can achieve in a given time period
- ideal = 80%

Question 2

capacity utilisation equation

Answer 2

current output
——————— x100
maximum possible output

Question 3

implication of underutilisation

Answer 3

1. increased costs per unit - likely to lead to higher prices
2. negative image i.e. stadiums having empty seats
3. unmotivated staff
4. redundancies, reduced hours, sale of assets, partial shutdown

Question 4

implications of overutilisation

Answer 4

1. need for staff to do overtime = raises costs, inc motivation as workers feel more secure
2. impact on brand reputation = positive/negative
3. quality
4. inability to take new orders
5. inability to perform maintenance on machinery (no downtime) - loos of production during repairs

Question 5

ways to improve capacity utilisation

Answer 5

1. INCREASE DEMAND
   - advertise/promote
   - cut prices
   - launch a new product
2. CUTTING CAPACITY
   - reduce staffing hours
   - change shift patterns
   - use temporary staff (greater flexibility)
   - use smaller premises
   - sell assets
3. INCREASE CAPACITY
   - invest in new machinery/labour
   - increase staffing hours
   - give some production to another company = outsourcing

Question 6

what does 50% capacity utilization mean?

Answer 6

fixed costs are being spread over fewer units resulting in higher
unit / average costs.

Question 7

capacity utilisation is an important concept because:

Answer 7

• helps improve efficiency = identifies unused resources
• average production costs fall as output rises = high utilisation can reduce costs = more competitive